“Modern chartalism theory states that under a fiat money system, money is created by government deficit spending. Because money is not tied to or backed by a commodity, money can only be created when the government spends money. Government may, or may not, ask for that money back in taxes. The demand to hold and acquire [this] money is driven by taxes levied by the state, taxes that can only be paid in the state issued fiat currency.” Wiki
This blog entry is my initial thoughts on and criticisms of MMT, as well as a consideration of its possible usefulness in transitioning to a resource-based economy. (Thank you Martin for posing the question!)
On the positive side Modern Monetary Theory (hereafter ‘MMT’) treats money as a necessary chimera to be controlled by us for the enabling of economic activity, and not as some Act of God or Nature equipped with magical intrinsic value and oh so handy for controlling wayward, lazy us. There has of course been MMT precedent, at least in nascent form, during the days of Jefferson and Colonial Scrip, and a little later during the revolution when The Continental (the name given the currency) did the impossible and funded US armies against the sovereign. The brave, new, revolutionary recognition was that governments could both lend and spend fiat currency into the economy. The success enjoyed by Pennsylvania with their variant of the colonial scrip system was particularly eye-catching:
“The model that earned the admiration of all was the loan office established in Pennsylvania in 1723. The Pennsylvania plan showed that it was quite possible for the government to issue new money in place of taxes without inflating prices. From 1723 until the French and Indian war in the 1750s, the provincial government collected no taxes at all. [ ... snip ... ] The currency depreciated by 21 percent against English sterling, but Rabushka shows that this was due to external trade relations rather than to changes in the quantity of currency in circulation.” Ellen Brown, Web of Debt, p39
More on currency depreciation later...
MMT focuses on full employment, which, especially in the light of recent research published in “The Spirit Level” by Wilkinson and Pickett, is certainly a noble intention, one in tune with homo sapiens sapiens’ base needs for respect and dignity, though this is a positive fraught with difficulty in my view. But perhaps MMT’s biggest positive is it differs from the current program only a little, which means switching over to MMT would not be very difficult technically. Only the argument need be won, albeit in a world highly suspicious of anything remotely resembling ‘just printing money.’ Perhaps we need only be cooly scientific when appraising the US Fed and other central banks monetizing sovereign debt through quantitive easing to demythologize money a little.
On the negative side are all of the problems money always brings with it. MMT money is, as are all other monies as far as I can tell, logically bound to scarcity, competition, profit maximization, perpetual GDP growth and ever increasing consumption, and most crime. Indeed, MMT is perhaps more attached to increasing consumption than are the more austere gold-backed or commodity/intrinsic-value money theories. And then there’s corruption, which is necessarily engendered by the systemic pressure of success being ‘Having More Money Than The Other Guy.’ No laws in history have ever prevented corruption, so the already very tricky task of printing the correct amounts of debt-free money in relation to money created by private banks, is yet further complicated (how often do government funded projects go over budget, and how water-tight is taxation?). Also, MMT sees debt-money as being self-destroying (see quote directly below) – either the debtor defaults, or the principal is expunged upon final repayment. But as we all know, the interest accrues to the creditor, and that is indeed ‘real’ money. (This is so obvious I wonder if I’m missing something.) As before, money-lenders accrue a larger and larger share of the available pool of money via the sucking up action of interest, once called usury. An MMT government would have to tax lending institutions down to size to prevent this distortion from becoming permanent, while at the same time printing money for the economy and taxing the correct amounts back out to prevent serious inflation/deflation problems from arising. Considering the ever-present power of lobbyists and the imperfection of politicians/humans generally, it is hard to imagine this being durably successful.
“All transactions between agents in the non-government sector net to zero. For every asset [debt-money] created in the non-government sector there is a corresponding liability created $-for-$. No net wealth can be created. It is only through transactions between the government and the non-government sector create [sic] (destroy) net financial assets in the non-government sector.” Bill Mitchell, emphasis added.
To my mind this is flawed reasoning arising (tangentially, though with clear connecting lines) from the terrible difficulties economists have — from Smith through Ricardo and Marx, into the neoclassical school, and now even post-Keynesians — defining value. By my lights, wealth (a form of value) cannot be created by any type of money creation on its own. New ‘wealth’ is assisted/facilitated by many different types of funding, in conjunction with technology. Technological developments are of course the source of all increases of living standards through the ages, bar none. If we travelled back in time and dumped 10 trillion dollars on primitive hunter gatherers, then left them alone with that cash but no know-how, their standard of living would not improve by one bit. Increases in ‘wealth’ (improving living standards) happen on the heels of technological advances (from farming to silicon chips). How new technology comes into being, that is, how it is funded and distributed, is a separate question. Money does not equal wealth. It is confused for wealth because it is such a good technology for enabling economic activity. MMT seems not to see this important distinction, though it is almost there, breathing on the window that looks out on this perspective.
The problem with pure debt-money systems is the ponzi debt-wall eventually encountered. There can never be enough money in the system to pay back the interest, except by extending yet more credit to cover existing obligations. If government issues debt free money that problem is somewhat assuaged, but the jobs, technology and other factors have to be in place in order for this created money to have something positive to do. That is key. Otherwise new money does nothing except inflate prices.
On to full employment. I am a big believer in the Keynesian observation of technological unemployment (MMT being, somewhat ironically in this case, a post-Keynesian baby), so worry that unless coupled with a major effort (very difficult to pull off I’m sure) to reduce the work week, the MMT push for full employment will end up looking something like communism, with increasing numbers employed by the State to do any old thing, so long as they are receiving a wage (which is also happening right now). Even with reductions in the work week, the nature of work is changing so rapidly, the highly skilled might have to pull 120, while the less skilled only work 20 hour weeks. I haven’t seen this issue addressed in MMT debates and writings, and am myself at something of a loss as to how to square this circle. Education will certainly be key, but that takes a lot of time and is also very difficult to get right. It takes almost a generation to equip the young for the future, but things are changing so fast, what we teach today is often useless information a decade later.
“The only sensible reason for accepting the authority of a national government and ceding currency control to such an entity is that it can work for all of us to advance public purpose. In this context, one of the most important elements of public purpose that the state has to maximise is employment. [… snip …] So then the national government has a choice – maintain full employment by ensuring there is no spending gap which means that the necessary deficit is defined by this political goal.” Bill Mitchell, emphasis added.
Fairness is always a priority consideration, no matter the model pedaled. Even the fiercest ‘free’ market liberal would argue that fairness is best served by his model, indeed justifies it, that minimal state intervention is the only guarantee of a fair and efficient distribution of goods and services. The road to hell is paved with good intentions, best to let the market work its magic via competition and equilibrium, and not touch, with well intentioned fingers, the running system. The more we interfere, the further away from efficient equilibrium the market, that beautiful state of nature, lurches. If unemployment rises, it is for good, internal reasons, and the market will adjust back to maximum employment in its own good time. MMT has the type of good intentions that so nettle ‘free’ marketeers, and though I am not a ‘free’ market liberal, good intentions of the full-employment kind worry me. We need in my view, going forward, a new way of earning our sense of self-worth, one that is not related to material success, nor to our wage, nor to our contribution to the economy. As I have pointed out before, economics values air at zero, ditto for important social qualities like trust, compassion, friendship, and a sense of belonging. Economics is, in my opinion, worse than useless at assessing value; its efforts in this area have had a net negative effect on society. We should therefore stop looking to economics’ pained struggle to define value via price and money, and search elsewhere. (The Venus Project would be a good place to start.) Full employment, though well-intentioned, is a dodo. We need a new model.
This full employment/technological unemployment blindspot shows how very mainstream MMT actually is, despite the knee-jerk abhorrence of ‘just printing money’ that still exists in spades in the public imagination. The standard dismissal of the problem of technological development rendering human labour less and less necessary, is that more work is created by the economy as efficiencies increase. This is the ‘lump of labour’ fallacy so often cited in discussions of technological unemployment, but as I have argued before, the real fallacy lies in assuming that the shrinking pool of available human-only work can power the entire economy indefinitely. It is our cultural sense that labour is a yucky effort to be rewarded/motivated by wages, that without labour we become lazy good-for-nothings, that there is no such thing as a free lunch, which taken together prevent us from recognizing labour as merely one manifestation of work itself, and that work can be fun, indeed should be. There will always be work. Exchanging labour for a wage, on the other hand, is a quite recent invention, and hardly a genetic necessity. We’ve been around for a couple of hundred thousand years. For only a fraction of that time have we exchanged our labour for money to survive. Accomplishment, as we all know deep down, is its own reward, as is success. Both phenomena were known to us before we invented money. Strictly speaking we do not therefore need a wage to make this so, or to prove that we have accomplished something, or succeeded at something, or even to get unwanted things done (so many of which can be automated). Society has many ways of bestowing praise and reward aside from remuneration.
In “Debunking Economics”, Steve Keen (who describes himself as almost being a post-Keynesian) points out that the post-Keynesian school has no theory of value. Since MMT is a post-Keynesian creation, and since it intrinsically requires maximum employment, I would say that the labour theory of value is as close to its heart as any other. For the sovereign to print debt-free money into the economy, and thereafter to avoid inflation, there must be corresponding economic activity, aka buying and selling, plenty of goods and services, and people earning money they can spend. If inflation is currency devaluation, and if inflation is in MMT combatted with full employment, then currency value comes from labour. We are back with Karl Marx (and Karl Denninger too, strangely enough — the people one finds in bed together!); ultimately money derives its value from labour, from people doing work which provides them with purchasing power. Of course in this case this is also akin to utility value, since money has to flow to all market participants to keep goods and services moving. Nevertheless labour is an unavoidable component in this system of money flow.
I have saved perhaps the most complicated issue for last. It lies in the area of currency exchange and international trade, hinted at above. Currency depreciation leads of course to price inflation of imported goods. For countries with few natural resources MMT might prove something of a time bomb. If oil were to be priced in a non-dollar currency (not a wild impossibility in the foreseeable future), MMT would be problematic even for the US should the dollar devalue relative to whichever currency, or basket of currencies, oil is to be priced in. And when we transition away from oil, those countries surviving from exporting it will also be in dire straights. I’m not sure if MMT can help here, at least not on the world stage. Saudi Arabia would have to import large amounts of resources, but would have next to nothing to export. I imagine this sort of problem affects many other nations besides. As Colonial Scrip experienced some 300 years ago, funding national projects by printing money to buy the imports necessary for their completion has a negative effect on your currency’s international standing.
The complexities arising from money as commodity and currency fluctuations generally are very difficult for all sovereigns to deal with, no matter how dominant they are on the global stage. For MMT to be worth its salt in practice, wouldn't near-global implementation of it be necessary? Some nations have to be losers in the balance of trade wars, have to be net importers. If they print off their own currency to settle their external trade bill, I cannot see how this would not devalue that currency. It is this aspect of MMT I find most vague and naively hopeful in the theory. Internally, within the domain of the sovereign, MMT seems elegant enough (forgetting problems of corruption and competence for one moment). Worldwide it would be a whole other kettle of fish. Dreams of elegant control and finesse almost always shatter when they meet the hard rocks of an uncaring reality. Nations are not separate systems equipped naturally with everything they need. The fact of widely and randomly scattered resources across the planet we inhabit demands of us international solutions to problems of scarcity and wealth distribution. It is at this international level I expect MMT to experience its greatest difficulties.
An open question: how are pensions managed in MMT?
MMT recognizes that, crudely speaking, all money is, in the end, somewhat like the money that comes delivered with the board game Monopoly. It’s there to make the game possible. In the beginning the amounts among the participants are equal, but over time the majority become poor, while one becomes rich. Luck, some skill, and the rules of the game, make this happen. In life this happens too, but in the real world, more money can be created, somehow, to cope with more players coming to the board, economic growth, and other variables. Taxation circulates money too, keeping the economy going via government spending and welfare. There is no state in the board game fulfilling this function, keeping the game going, which is how there can be a sole victor. The ultimate question is whether MMT can tune the state’s activities to get the best out of money’s role in society, or if money, as I believe, is in fact a flawed technology in light of other technologies rendering human labour and scarcity slowly redundant.
Will money creation along MMT lines be part of a transition to a resource-based economy. I think so, but in an as yet unseen form — a money fully automated on the supply side, with no interest anywhere, that cannot be treated as a commodity, and that is global.
The current system is an implicit variant of MMT anyway (fiat is a major part of it, and the Fed and Bank of England are bidding, via quantitive easing, at their own auctions). We are also, in my view, already transitioning implicitly, away from scarcity and towards abundance. For me the big question is whether monetary collapse must occur before wide, open recognition of the validity of a post-scarcity, non-monetary society can begin. With peak-oil making the news again, and the usual attendant reaction of doom and gloom, our cultural inability to contemplate seriously radical alternatives like a RBE, in the face of radical challenges, is the main issue. While we continue to believe there’s only one game in town, we flirt with unnecessary disaster. Hopefully, the good sense inherent in MMT will win the day, and lead to a softening of attitudes to money generally, as part of the softening of cultural loyalty to old platitudes and received wisdoms about value and human nature. To want a system in which we are money’s masters, not its servants, would be quite a victory. The far harder part though would be sustaining an MMT system globally.